Britons are turning their backs on pensions in record numbers even though the main alternatives – Isas and buy-to-let – lack the generous tax relief that pension contributions attract.
Pension saving has fallen to its lowest level for a decade, with just 38pc of people putting money into plans in 2009/10, compared to 46pc 10 years earlier, according to the Department for Work and Pensions.
With stock markets subjecting investors to stomach-churning volatility, poor returns on most asset classes and a steady decline in annuity rates, it is perhaps no surprise that fewer people are saving in pensions.
Residential property valuations may have been struggling since the financial crisis, but, despite this, buy-to-let has still managed to fare better than many other asset classes over the past decade.
Arguably, as close as you can get to figures for the average returns from professionally run buy-to-let property investments is the IPD UK Residential index, compiled by global property data company IPD. In the decade to 2010, residential property generated an annualised return of 7.1pc, adjusted for inflation, compared to 0.8pc for shares, 3pc for gilts and 3.7pc for commercial property.
Experts are divided as to which is the best way to save for your retirement. Pension, buy-to-let and Isa all have their supporters and which is right for you will, to a large extent, depend on your age, the type of person you are and how much money you are earning.
Property
Roll back to the middle of the last decade, before buy-to-let played its part in bringing the economy to a halt, and it seemed everyone was building their retirement on bricks and mortar.
The credit crunch may have brought buy-to-let to a near standstill in 2008 and 2009, but all the signs are there that it is starting to make a gradual comeback, with the number of landlords taking out mortgages for buy-to-let properties growing by 16pc last year, according to the Council of Mortgage Lenders.
For those with money to invest, it is easy to see why. Rising rents have seen yields on buy-to-let properties jump to 6.6pc, having stayed within a range of 5.9pc and 6.3pc for the previous five years, according to lender Paragon.
Ray Boulger, senior technical manager at John Charcol, said: "If you have found a property where the rent will cover the mortgage repayments you have two big questions. First, will rents go up if and when interest rates rise so they still cover your mortgage? And second, will property prices increase over the long term?
"If you are worried about an increase in interest rates, then you can get five-year fixed-rate buy-to-let deals at just under 5pc, compared to just under 4pc for shorter deals," said Mr Boulger.
He pointed out that one key difference with buy-to-let compared to other ways of saving for retirement is the ability to borrow to gear up your investment, which is not usual for Isa or pension saving. That said, you can borrow 50pc of the value of your Sipp to fund purchases such as commercial properties.
Buy-to-let mortgages that require a 25pc deposit are common, however. "Gearing your investment in this way means if the property only increases in value by 2pc a year, that works out at an 8pc annual increase on your investment," said Mr Boulger.
"While your short-term view of the property market may not be positive, it is hard to believe that house prices are not going to rise over a 20- or 30-year period."
Isas
Have become a popular alternative for those put off by the inflexibility of pensions, offering the ability to shelter up to £10,680 a year from the taxman – half of which can be in cash on deposit – as assets held within them are not subject to income tax or capital gains.
Unlike pensions, which can only be drawn after the age of 55, withdrawals can be made at any time, making them ideal for people who want access to cash in the event of an emergency, or who think they may end up on means-tested benefits when they retire.
Ros Altmann, director-general of Saga, said: "If you think that you are going to be affected by means-tested benefits when you get to retirement, you are better off putting your money in an Isa.
"That way, if you get to retirement and find that saving has not been worthwhile because you will be little or no better off, you can spend the money on that trip of a lifetime."
With a pension, you can only do this if your pot is so small that you are allowed to take it as a cash lump sum, under a special rule that allows funds worth less than £18,000 to be taken as cash, 25pc of which is tax-free.
Ms Altmann argued that for young people, particularly those who are basic-rate taxpayers, locking your money in a pension makes little sense, particularly if there is no employer contribution being offered.
"Let's not forget that buying a first home is a form of retirement saving, too. Saving in an Isa to make this happen could be much more of a priority for young people," she said.
Pensions
Your money is locked away for decades and you are effectively obliged to buy a seemingly poor-value annuity. So why does anyone invest in pensions at all? Two main reasons – tax relief and employer contributions.
Tax relief is granted at your marginal rate, which means the higher your tax rate, the better deal a pension is for you. If someone aged 55 who pays income tax at 40pc pays £8,000 into a pension, the government boosts that to £10,000 with basic-rate relief.
A further 20pc tax rebate is given on filing a tax return. Because they are 55, they are allowed to withdraw 25pc of the pot as a tax-free lump sum. Allowing for this £2,500 withdrawal, and the £2,000 tax rebate, the individual then has £7,500 held within the pension for a net contribution of £3,500.
Mr Cox said: "When it comes to tax efficiency, a pension is the clear winner, particularly for higher-rate taxpayers."
Contribution levels are also higher for a pension than an Isa, with up to £50,000 a year, and from next April £1.5m over your lifetime is capable of being sheltered in a tax-advantaged environment. And contributing into a pension is even more of a no-brainer if your employer is prepared to match the contributions you make.
But the downside is that you cannot access your money until you are 55 and you have to draw your money as income.
Some content and comments within this blog post are originally from The EXPRESS newspaper 20/01/2014.
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